I'm the Founder and Managing Partner of Ironfire Capital LLC, which runs a tech-focused hedge fund and angel fund. I did a Ph.D. in Management at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management. You can follow me on Twitter @ericjackson, subscribe to me on Facebook, follow me on Sina Weibo, or Circle me on Google+. My email is: dr.eric.jackson@me.com

Google's Big Problem They Don't Want You To Know About

I thought it was interesting when Susan Wojcicki, SVP of Ads, referred in her prior answer in her “script” when answering an analyst’s question later. Everything Google says to the public comes from a “script.” Nothing is dropped by chance into a comment.

Larry, Patrick Pichette, Nikesh Arora and Susan know that statistics are like pablum for business media and Wall Street analysts. They eat it up and then they regurgitate it like a 12 month old child. They don’t question it – because they haven’t developed their vocabulary skills yet. They just take it in and throw it back up.

What’s more, once one person in the media or on Wall Street repeats that stat, it becomes cited by a 100 other (so-called) journalists or web-scrapers as it bounces around the Internet echo chamber. Who has time to question these numbers? We’re just lowly journalists on a deadline for our next story. We’re not compensated to actually push back and think. It’s just on to the next drive-by report we’ll write.

What’s more, this is Google – and Larry Page! I’m not going to be the one to say this emperor has no clothes, seems to be the thinking on their part. Nobody ever got fired for buying IBM and no journalist ever got fired for repeated back what number some tech CEO throws out.

But let’s pause and take stock of what is going on right now at Google. It has perhaps the best core business that has ever existed in business for at least the last 100 years: its ad business (AdSense/AdWords). That business accounts for 96% of Google’s revenues (for a breakdown, see here). From that business, it’s stockpiled $44 billion in cash – up $10 billion from a year ago.

With this enviable cash, Google has been able to invest in a lot of new products and businesses, such as YouTube/display, mobile, Docs, Android, and Gmail. Although Google is eager to tell you how well each of those nascent businesses are doing on an annualized basis, they still account for 4% of Google’s overall revenues.

The core business — the 96% — is slowing. Google of course will not say this but it inarguably is. The best explanation I have seen of this since last week’s call is from Business Insider’s Henry Blodget. Among Henry’s conclusions:

- Google’s core search business slowed more sharply than expected even in the US

- Mobile search, which is accounting for an ever-bigger percentage of overall searches, is less profitable than standard PC-based search – and this is not likely to change

- International’s growth in the core business is down to 28% from 41% a year ago

- The growth in the US for the core business was flat at 26% year-over-year

Google tried to blunt this criticism on the call with Pichette (the CFO and attack dog on these analyst calls) saying — in response to a good question from Macquarie’s Ben Schachter:

You also have to remember that last year at this time, right, we had such a strong comp. We had such an amazing Q4 of 2010. That the year-over-year comparison in a way represents also this really high kind of level on which to start from. And so from that perspective — and if you also look at our mix between our own Google websites versus all of our network, I mean, our core properties continue to be actually very strong. So for all these reasons, I wouldn’t be worried of the way that you’ve described it. In fact, we’ve got — continue to have very strong growth.

The other elephant in the room last week was why the sudden drop in CPCs (cost-per-click or basically how much profit Google makes from each click as part of their ad business)? Blodget – I think quite rightly – suggests that it’s from more and more people searching Google on mobile where Google doesn’t make as much money as they do from PC-based searches.

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I am sick and tired of these companies forcing stuff down our throats. I quit and deleted my facebook account because it just got too intrusive. Now everyone wants to be Big Brother and I’m just sick of it. They ought to pay us for joining. They make more money than Soros off of our personal interactions. When are these sheep going to learn that they are being herded?

This would be the perfect time for Apple to release Siri as a search engine. Put it right in the Safari search bar as an option. Offer it as a plugin for Firefox. Then we’ll see how much Google’s per click ad revenues are really slowing down.

“If I’m forced to sign up for + as part of registering for Gmail, YouTube or search, should that count as a registration? And if I then do a search or check my Gmail, should I be counted as engaging with +? It’s laughable.”

While I’m in full agreement, Google misleads us constantly about their products, they’re not Facebook which does the same exact thing. Facebook’s member count and time spent on Facebook is in full spin cycle.

The focus of this story changes drastically from beginning to end. I still do not know what Google’s “big problem” is. Your reference to their “scripts” does highlight the intentions of Google’s executives to perpetuate positive talk and ideas about the well-being of their company. However, this tactic should be expected of a corporation with a high market cap. Larry Page simply recognizes that a large part of stock market activity stems more from public belief than the actual finances of the corporation. As for the undefined terminology in Google’s released statistics, this could also be a strategic move which recognizes how easily information is transferred and impacts consumers. While Google’s core business may be slowing slightly, Larry Page is obviously attempting to make up for this decrease by attempting to divert public focus to other, potentially more-profitable aspects of the company. Google doesn’t have any kind of big problem, or at least you don’t point one out in this article.

You say, ‘Google doesn’t have any kind of big problem, or at least you don’t point one out in this article.”

Really, no problems? You might want to read the article again – Google has problems, at least from the perspective of its investors.

There are many upcoming and growing factors that will put downward pressure on all key financial indicators – Mr Jackson only highlighted a few of the more ‘farcical’ double-speak ones presented by Google execs in the recent earnings call.

You also clearly did not read the analysis systematically presented in the BI link. Also, the stock fell off a cliff last Friday – does the market have it wrong too?

The stock fell off a cliff because they missed their earnings by $1. That generally falls under the category of speculation, however I am not suggesting that is or isn’t the only problem. I am still skeptical and becoming more skeptical the more manipulative their practices become obvious…

If I need an e-mail address to signup for a site, I can generate one immediately for free. I use fB (with highest security settings set) to connect with friends and family now (I was against it at first, but gave in) I have no clue nor to I really care to learn how a lot of the new Google services work. Too much effort when I just want to talk to my friends about the cute cats…

That explains why out of my 1,000+ contacts, about half have a Google+ page, but only about 10% of them even have a profile picture. Why don’t they just say what metric they are measuring and be honest and upfront. If they are losing revenue from search, they will find somewhere else to make it up. Online advertising is still growing, there is no arguement against that. As long as Google is innovating and keeping up with the times they will keep making plenty of money. They just need to remember that the core of their business is built on trust. To advertisers and searchers, so they should make sure we trust them.

You are right–listening to gobbledygook can be infuriating. But a lower cost-per-click is actually good for advertisers, and what’s good for advertisers is good for Google and ultimately good for investors. Still I’d love to know what were the 20 things they did that lowered cost-per-clicks. I wonder if Google advertisers have a sense?

I’d be interested to hear where that judgement comes from. Have you spoken to any of these advertisers? For most direct response businesses, Google is still an incredibly effective tool, at least in the markets I tend to work in (which doesn’t include the US btw).

I’d guess that mobile searches, which are currently cheaper, could be driving this down, but these will not remain as cheap: as more & more people use mobiles for the things they’ve previously used computers for (i.e. ecommerce), so the value of those searches to advertisers will increase and they won’t be able to afford to not invest in them, almost, if not exactly, as aggressively as they have done on the desk-top.

I would agree. I skate the web with the Mozilla Firefox browser and utilize add-ons that block everything from tracking cookies to advertisements from even appearing on my screens. (I specifically allow some like hulu secured, etc.)

Considering how popular and easy to use these technologies are, I have always wondered “What kind of person actually clicks on an add? Should they pay me to waste my time on them?”

And with these technologies being readily available, it is only natural that the market would demand a cheaper price per click.

Some sites even mandate cookies must be enabled in order to gain access.

If Google and advertisers want to see their profits increase, their adds more effective, not only will they will need to find more meaningful ways to engage us customers, they will need to find work arounds for these tools. And I think that is where targeted advertising will come into play. (Think of that annoying CSpire commercial, and replace apps with adds)

To sum up… Google and advertisers will need to create a new experience for us, something that makes us feel welcomed, that we belong to something greater than ourselves, something that we honestly need or want (or at least you can make us think we need / want it).

But alas, I will never experience it as I use the following technologies: Adblock Plus Ghostery

Yes, people think Google is some innovative company but the truth is after launching 100 different businesses, they have literally NOTHING to show for it. They are NOT innovative. They are a one trick pony company – people lump them in with Apple but really, it’s laughable. Never mind that Android cannot run on tablets because SJ realized that Scmidt was just running back to the office so SJ did not show him the iPad and they have made the classic mistake of buying a huge new company to integrate (one with low margins) – Moto … meawhile, Apple has launched 6 MULTI BILLION dollar divisions in the last 12 years. That is REAL INNOVATION and not just PR. Google is just a smarter Yahoo but not much after 15 years …

No, your laughable. You are not forced to sign up for + if you sign up for Gmail or YouTube. Im not shure if this makes any difference, but I’m on the mobile site and when I go on google.com/+ it displays my name and clearly says “By tapping “Continue” you are creating a public profile, agreeing that Google will use your location, and accepting the Mobile Terms of Service and Privacy Policy.” That means that you do not have an account if you have a Gmail or YouTube because I wouldn’t need to create an account if I had one. P.S. I have a YouTube and a Gmail, but I did not ever create or use Google +

“If I’m forced to sign up for + as part of registering for Gmail, YouTube or search, should that count as a registration? And if I then do a search or check my Gmail, should I be counted as engaging with +? It’s laughable.”

Overall a strong article but I did find this statement a bit odd.

If Google was forcing users to sign up for + when registering for Gmail, YouTube, OR search (let alone any combination of the 3), they’d be well over 90 million users now. Do you actually know of any cases of forced sign-up to use these basic Google services? I use all of them and definitely don’t have a G+ account.

I do think that 60% of users engaging daily is probably overblown, and I think that is why the term “engaging” was used instead of “visiting” or “updating” or “posting” or anything that indicates real social networking activity. 3rd party estimates place this much closer to 20%, which is probably closer to reality.

First, Google has no compunction against dropping thousands upon thousands of publishers from its bankroll simply because it doesn’t want to pay them. Not good for business when you destroy your customer base.

Second, Google says it wants quality content but continues to reward keyword stuffing, artificial backlinks and its own content via YouTube, Google+, etc. This turns the Internet into a manipulated, paid for classified garbage dump, not free access to the highest quality information.

If Google spent have the investment dollars learning how to qualify good content over keywords and backlinks, the Internet would be a much better place.

There search garbage opens the floodgates for new innovators to encroach on their search/advertising business, which Microsoft is slowly figuring out.

In August and September Google charge my adwords account more than $10,000. My previous adwords campaigns were productive. In those two months Google provided me with $9,500.00 of worthless advertising clicks. When I contacted Google, I was told that the blame was mine because I used broad search. I received gobbedygook from their customer support. Google refused to admit their algorithim was the problem. I believe other have suffered at the hands of the arrogant management of Google. I do not trust google to manage my keyword advertising correctly.

So let Google baffle the questioners with BS. Wait until next quarter to see if their explanations carried any weight. It’s still going to come down to pure revenue and profit numbers QoQ. If they’re down next quarter then Google wasn’t telling the truth. All the fancy words in the world isn’t going to change the fact that Google is likely losing money on ads. Why even bother to argue about it.

Google is trying to keep its P/E multiple high along with its share price. They have to at least try. Next quarter will prove whether they’ve been successful or not with their ad click algorithms. It would be funny if mobile devices are basically doing an end run around Google search. If Android growth really does start to slow, Google certainly could have a few problems about where to siphon more revenue from if Wintel PC/desktop usage continues to slide.

There is ONE killer app that can boost both FB and GOOG to trillion dollar annual profits, but it can’t be done without an act of Congress. The legalization of internet gambling would make these two the biggest profit engines in the world. FB has hundreds of millions playing apps and chatting for hours a day. Google has the Android system. Just imagine if they could have people playing with real money with their apps and games. It should be no surprise that the Democratic Party has done a full 180 and now support repeal of the Republican law against internet gambling. To go to the next level, GOOG has to invest heavily in politicians.

I would agree. I skate the web with the Mozilla Firefox browser and utilize add-ons that block everything from tracking cookies to advertisements from even appearing on my screens. (I specifically allow some like hulu secured, etc.)

Considering how popular and easy to use these technologies are, I have always wondered “What kind of person actually clicks on an add? Should they pay me to waste my time on them?”

And with these technologies being readily available, it is only natural that the market would demand a cheaper price per click.

Some sites even mandate cookies must be enabled in order to gain access.

If Google and advertisers want to see their profits increase, their adds more effective, not only will they will need to find more meaningful ways to engage us customers, they will need to find work arounds for these tools. And I think that is where targeted advertising will come into play. (Think of that annoying CSpire commercial, and replace apps with adds)

To sum up… Google and advertisers will need to create a new experience for us, something that makes us feel welcomed, that we belong to something greater than ourselves, something that we honestly need or want (or at least you can make us think we need / want it).

But alas, I will never experience it as I use the following technologies: Adblock Plus Ghostery Ctrl+F4

Of course mobile search is less profitable. There’s less screen space to fill with ads.

Google is already cramming so many ads and Google owned content on search result pages that there’s push-back. Users are installing ad-blocking programs, and competitors are suing Google for giving prime space to Google’s own content.

Increased ad density is a bad sign. Myspace tried that when their revenue started to slip. That didn’t end well.

Google’s venture into “social” can turn users off if it becomes too ad-heavy. Search ads can be a useful service, because they are presented when the user is actively looking for something. Social ads are merely an interruption of other activities, like TV commercials.

I use Facebook, despite hating it, and had high hopes for Google+, but their real name policy turned me off, and their persistent attempts to shove G+ down our throats has just ensured that I’ll never use the service.

There was a time in Business Journalism, ALL journalism for that matter, when the exploration of “FACTS” was not meant as motive for cynicism but rather a necessary and expected journey to find Truth….

Perhaps more Journalists AND Media Conglomerates need their “TRUTH” ticket punched so that people ARE genuinely surprised at the hypocritical “Do No Evil” that permeates Wall Street and Corporate Media.

Noone has called out facebook on their magical numbers, so why not use them yourself? I detest facebook, and after having looked up someone for a message, I am now considered a user, no matter how many times I unsubscribe.

And talk about bloated numbers regarding net worth, this faceb IP should be eaten by the big boys for helping to “create” it’s relevance.

I’m probably not as smart as you, but I can at least identify two things that are happening in these comments-

First of all, this is as close as Google is going to come to saying that some of their changes were bad ones. You don’t want to come out and publicly say that sort of thing because it would rip at morale in your company and be very impolitic from a corporate political correctness perspective, but it is very possible this is what they were saying.

The other thing they might have been trying to explain (and this is I think the more likely) is that some of their advertisers pay not per click, but a flat fee for the placement. Let’s say I pay $10,000 for a one-week ad for my website when you search “Forbes”. Now, let’s presume only 2,000 people click this ad in that week.

What’s the CPC? $5…staggeringly high, right? Now, let’s say Google makes some changes to get more people to click on the ad, and I buy a second week of advertizing for the same price, but this time, 200,000 people click on the ad. Now what’s the CPC? 5 cents. Is Google’s core business hurting here? Nope, in fact it is doing better- they’ve made a change that generated more clicks, which will allow them to raise the flat rate ad price in the future- but in the meantime, their CPC metric went down. It is quite easy to over-focus on metrics to loose the big picture, which is possible here. What happened to their overall revenue? If their overall revenue held steady or increased while CPC went down considerably, it is safe to say it is something like what I’ve described

Again, that’s my best guess at how to interpret this- if this is what happened, then Google just needs to learn how to explain these things better, because it certainly did come out as gobbley-gook.

Google is becoming like Microsoft. MS depends of Windows and Office and Google depends on Ads. Both have a lot of cash but do not know what to do next. Both design a crap OS that flood the market while enable/encourage virus writer to work on it. And a lot more other similarities…

So the big secret is that Google’s ad revenue is riding at the peak that the market will bear? Maybe the bigger elephant in the room is the flawed shareholder expectation that stock values and profits will go up and up forever. Profits can’t go up much more until the entire economy grows enough to support a bigger internet ad market. That won’t happen until the consumer class (middle class) has revenue gains (better wages) to increase disposable income that can be spend on the goods that Google advertises. The middle class are the real job creators, because they are actually numerous enough to drive a mass production economy.

I LOVE using Bing search at work where I do 90% of my daily searches. Bing’s interface and maps are much better looking. In the odd chance that I cant find it on Bing, I search for it on Google. But, that’s about 4 times per week.

“Last week, he crowed triumphantly that Google+ had hit 90 million users with 60% engaging daily. Again, the problem is that Larry didn’t define his terms. If I’m forced to sign up for + as part of registering for Gmail, YouTube or search, should that count as a registration? And if I then do a search or check my Gmail, should I be counted as engaging with +? It’s laughable.”

Unfortunately, you are incorrect. According to Mr. Page, 54 million people interact with Google Plus every day (.6*90 million). You are suggesting that checking your Gmail counts toward those 54 million interactions per day. That is nearly impossible.

There are 350 million Gmail users. If those 54 million Google Plus interactions come Gmail, than only about 15% of Gmail users check their inboxes daily, which is a very low number.

I agree with your analysis – the conference call verbiage was defensive, which says a lot.

One point I think you’ve missed in discussing the one sector of mobile search that is /more/ profitable than the PC side – searching for, say, a cup of coffee, or the best closest Indian restaurant – that is to say, local commerce searches – is the fact that there has been competitive disruptive tech introduced recently.

SIRI. When I want to find the closest comic book shop, I’ll whip out my phone and at the touch of a button it will listen to me ask where the closest comic book shop is, it will give me a few options, and I’m on my way. No. Google. Involved.

I have a Gmail account and haven’t been ‘forced’ to join G+. I had a YouTube account before Google bought it and signed in with Yahoo!- that is still the case. It isn’t to say that they might not change that in the future, but, for now, I don’t have to be a member of G+ to access either of those services. While Google has obviously been concerned about the mass appeal of FB, thus their concentration on G+, Mobile advertising has snuck up behind them and grabbed a large percentage of Ad revenue. I find it rather ironic, however, that they seem hell-bent on punishing the small ad publisher with their Panda and other search updates while pushing G+. What is the incentive to continue to use Adwords, when that screwdriver is broken? I hope publishers leave that product in droves and their revenue falls off a cliff.

No matter how much Google slows down it will remain one of the top investments in the world until someone can invent a better way to provide search engine type technology. Even if Google’s “lesser” revenue streams provide only 4 % of net profit, they are still so integrated into our culture that they have become verbs. Virtually every internet marketing course I’ve read is akin to reading a thesis on Google fu. As advertisers and individuals move onto mobile platforms they will need to advertise there as well. No matter how you try to avoid it, at some point you will need Google to integrate as part of your business and their are far more ways to create money from a company with an impassable moat than their are ways for it to fail. Over time all of the smaller, successful investments: Android, Youtube (smaller – kind of funny) et.al will provide more revenue and the core business will grow on mobile more likely than disappear. Who wants to create businesses on any platform without advertising. On another note – Google’s Gmail advertising is insanely effective. Even without wanting to I have clicked through more times than I care to admit. Google is at the beginning of its ascent – not at it’s slowdown

So the biggest question is why CPC is down? If it is related to the number of add clicks on a mobile device then you have to wonder why those don’t generate the same revenue as the PC based ad. My best guess is the mobile ads do not link to mobile friendly sites. If it is not easy to make a purchase on my mobile device then I won’t make it and if it is not the ‘need’ but was more of a ‘check out line’ purchase then I will not take the time to look at it on the PC. The fact is no one will always have positive growth quarter after quarter without innovation. Some of that innovation will drive the business forward and some of will need to be evalutated again after deployment.

CPC means cost per click. Advertiser decides what they want to pay per click. Amount is more often than not directly tied to revenue advertiser generates as result for click. You are spot on about one pitfall of econm – sites that for whatever reason actually discourage conversion (searcher interaction). That paired with other hindrances and equal lower CPC. Lower CPC and fewer clicks combine to return less topline ad revenue to anyone.

This is a super article. I am always on the lookout for writers that are analytical, unafraid to call the GOOG out when evidence points to no other logical or even plausible conclusion…and funny. Been too close to this space for too long, please someone anyone point me to a refreshing, new set of eyes commenting on search.

i would say put my picture up with these rich guys but it all depends on what you think rich means ?? if you think having money makes you rich think again !! I offer people the power to create there ideas in there hands using machine technology. You draw it we make it.com (2013) we are currently in the designing stages of our business… the funny thing about design is that its never complete…. it always gets better… just like us… www.inventapart.ca you can invent the future, you just have to invent in it and create it !!!) where does this all come from… bedtime zzzzzzzz;)

The answer to your query on Google Adsense being down is simple. They changed the search algorithm to placate the Chinese. They moved government sites ahead of free enterprise sites and anyone with a little savvy knows that government sites for the most part are worthless and not use, just stops the search.

They have now fixed that or are in the process of fixing that with the new algorithm UX (User Experience), this should help. You fail to mention the fact the Bing is gathering steam in North America and Google has lost a lot of share to them. Also Bing will be more aggressive world wide before too much more time passes and Google will have it’s long awaited slip.

They’ll always be a force to deal with but I know many who are switching email accounts and such because of the new unified “we want to know everything about you policy”. When you see ads beside your email that reflect the content of your email you know your mail is being read, electronically at least. The fear is reading, sorting, disseminating and passing on to whomever. Maybe big brother has arrived and its name is Google.

I like blogging on the New York Times site and many others and just started here and have noticed that ‘most’ people do not use their real names. I have tried looking people up and unless you can read their minds you have no idea what their imagination might conjure as a ‘handle’. Reminds me of the citizen band radio handles that only served to warn a person about Smokey. People had to know how to drive to mix in with the tractors on the highway. Today we have acquired everything we own at low interest rates. The banks have their money printed for zero percent. If people want to take chances with the money of others, they incorporate. I am bored writing this.

The word for today is accountability. Nobody has it. The only thing I have counted on in the last few years is myself and my lady and the fact that I can type ‘anything’ into the Google page and get to the bottom of it, whatever ‘it’ is. They can tell me who has a product that has to do with my search and I can decide if I want to buy, all from the comfort of my chair. Seems people want a problem; they are not happy when things are going good. Let us take the day off on 2012-02-14, gather your loved one, or ones’, and march on your local government. Do not do anything. Walk up as close as you can and just stand there in silence. Creep them out. Maybe on 2012-02-15 they will call or write you and ask if there is anything they can do for you.

Accountability and something to do to gauge the ‘real’ problems of society.

Laughable? Mmno..Disturbing? Yes. That is because they’re just showing how wary they are about making statements when it comes to performance. Why? Because Google has always been seen as a performance company. And when a top performer stops performing that well, pretty much everything about him goes down along. Knowing every Google product is designed around..well, Google – the search engine – that means really bad business! The one big mistake(yet one greatest strength, paradox) that Google made since the very start is think of themselves – the search engine, again – as the epicentre of the internet, thus named everything Google..Docs, Mail, Video, + ..this..that. And when the main business slows down, all the other tend to follow suite. It all falls apart in one big dance, like a supernova, imploding.

To also give an answer about their yabberish talk – they just couldn’t state that they had to bring something new – just anything – to stay relevant, but their multi-variate tests soon couldn’t be digested properly and entirely – and the result is just what we’ve got – nonsense in AdSense.

No offense but I doubt that the investment greats have hinged too much on media gossip. Only the long term investors have made easy, enjoyable money. To think on your feet and pay your taxes and find a good woman and people you can trust is what IT is all about. It is my thinking that Google is doing good, so far, and I might be preaching to the converted but it seems that the ‘serious’ investor is staying with the ship.

I know that Google cannot sustain massive growth by concentrating on its paid ad services. But I don’t think a focus on Cost-per-click metrics proves that point.

Google’s algorithms are changing. Before, Google would give large weight to the first few words of your query. Now, Google’s algorithms are advanced enough to decipher whole sentences, and then give a search engine results page (SERP) based on that.

As Google’s algorithms advance, ‘long-tail’ terms become more valuable, while generic terms that were once expensive become less valuable. To save money, a mesothelioma lawyer (mesothelioma is massively expensive per click) might now focus on other related terms which are less expensive, but which Google’s algos now give more visibility.

Lastly, you must remember that Google’s clients bid on what words they want to pay for. This means that pricing for ads can change dramatically, and quite quickly. Whether the result is good or bad will be determined by Google’s continued ‘experimenting.’